As a real estate investor, it’s critical to know what a bank will appraise a property for once it’s been developed. Poor, or aggressive, appraisals can kill your project. If your strategy is to fix and flip, then an appraisal is necessary in order for the hard money lender to know how much the property is worthy.
Most hard money lenders give loans based on the after repair value – which means they’ll give you a 60-70% LTV, based on this value. It’s important that the appraisal by the hard money lender be aligned with the appraisal from the buyers lender. Even though a hard money lender might appraise your property at a higher value – what ultimately matters is what the buyer’s lender appraises it at.
For example, if a hard money lender appraises your property at $140k – but the seller’s lender appraises it at $120k, the difference is $20k will bite you (the developer).
Why do hard money lenders want an appraisal?
Hard money lenders rely on appraisals, because they are lending based on the value of the property. They are giving you money – not because of your capability to repay the loan — but because the value of the property far exceeds the loan they are giving you. As a result, if you default on the hard money loan, they can take possession of your property and sell it.
Appraisals are an opinion provided by licensed appraisers. It provides information on sold, pending, and active, comparable properties, and photos and relevant info on those properties. This is different than a Broker Price Opinion – which is a real estate broker’s assessment of value. This is a much shorter report – normally 1-2 pages long. You have to be careful with BPO’s because the value you get is only as good as the broker.
Once you have your appraisal, you can request for another appraiser to review the appraisal you received. Any hard money lender will look for an appraisal before giving you a loan. Without an appraisal done, you should not spend time speaking to a lender.